Unpack Your Financial Baggage

Behavior and Your Retirement

In the world of behavioral finance, there are common mistakes people make that can impact their financial well-being. In today's discussion, we're going to explore nine key behaviors that often lead individuals down the wrong path in their financial decision-making. These behaviors can be seen as the "nightmare" of mistakes, as they have the potential to wreak havoc on your financial future.   Branden Carney and Lou Melone of Melone Private Wealth join RJ King of D Business Magazine to discuss. Loss Aversion: Loss aversion, is the tendency for individuals to fear losing money more than they desire gains. This instinctual behavior can make us overly cautious and risk-averse, preventing us from making informed investment decisions. Understanding that this fear is rooted in our evolutionary history and seeking guidance from a financial behavioral coach can help us avoid this trap. Narrow Framing: Narrow framing involves making decisions without considering all the implications. This cognitive shortcut can lead to poor financial choices, such as falling for sales tactics or failing to see the bigger picture. To avoid narrow framing, it's crucial to educate oneself and work with a financial planner who can provide a comprehensive perspective on financial decisions. Mental Accounting: Mental accounting is the practice of assigning subjective value to money based on its source or intended use. This behavior can lead to irrational financial decisions, such as overspending when using credit cards. To counter mental accounting, it's essential to treat all dollars as equal and make spending decisions based on rational financial principles. Diversification: While diversification is often touted as a wise investment strategy, it can be deceptive when not done correctly. Merely owning multiple stocks in the same industry doesn't provide true diversification. The key is to have a well-thought-out diversification strategy tailored to your long-term goals, which should be part of a comprehensive financial plan. Anchoring: Anchoring is the tendency to rely too heavily on the first piece of information encountered when making decisions. This behavior can lead to misguided investment choices based on initial impressions rather than careful analysis. To overcome anchoring, it's crucial to have a financial plan that anchors your investments to your long-term goals, reducing the influence of short-term market fluctuations. Optimism: While optimism is generally seen as a positive trait, overconfidence can be detrimental in financial decision-making. Believing that everything will work out can lead to reckless investment choices. The key is to strike a balance between optimism and realism, which can be achieved through a well-structured financial plan and ongoing guidance from a financial planner. Media Response: Media response involves reacting to news without reasonable examination. It's easy to be swayed by sensational headlines and make impulsive financial decisions. To avoid falling into this trap, it's essential to stay informed but also maintain a long-term perspective based on your financial plan rather than reacting to short-term news cycles. Regret: Regret can be a powerful motivator, but it can also lead to emotional decision-making. Fearing future regret can cause investors to make overly cautious or risky choices. The key to managing regret is to have a well-defined financial plan that aligns with your long-term goals and to trust your financial planner's guidance. Herding: Herding is the tendency to follow the crowd, even when it may not be in your best interest. This behavior can lead to investment decisions driven by peer pressure rather than rational analysis. To avoid herding, it's important to stick to your financial plan and avoid making impulsive decisions based on what others are doing. Understanding and addressing these behavioral finance pitfalls is essential for making sound financial decisions. Working with a trusted financial planner who can act as a behavioral coach and guide you in creating and sticking to a comprehensive financial plan is the key to avoiding these costly mistakes. By anchoring your decisions to your long-term goals and maintaining a rational, informed approach, you can navigate the complex world of finance with confidence and resilience.. Resources: Lou Melone's book, "Unpack Your Financial Baggage:" https://www.amazon.com/Unpack-Your-Financial-Baggage-Misconceptions/dp/1948237776 [https://www.amazon.com/Unpack-Your-Financial-Baggage-Misconceptions/dp/1948237776] Melone Private Wealth Website: https://www.meloneprivatewealth.com/ [https://www.meloneprivatewealth.com/] D Business Magazine Website: https://www.dbusiness.com/ [https://www.dbusiness.com/]

Financial Planning If You Are Under 30

In today's episode, producer Jon Gay is in for RJ King.  He and Lou Melone are joined by Certified Financial Planner Branden Carney to talk about financial planning for those under 30. Financial education is not often focused on those between the ages of 18 and 30, despite the fact that this age range can include some of the most consequential financial moments of your life - from buying a house and getting married to having kids and more! Often, those under 30 are simply told "do this or else." A lack of experience, when combined with a rapid rate of change, can sink a young person financially.  This is why it's best to create a financial plan.  Also, we go back to behavioral investing.  Not only are circumstances conspiring against you under 30, biology is too! Functional MRI (FMRI) studies show that when a young person is thinking about their future self, the brain behaves as if it's thinking about a completely different person.   It disassociates that "future" you with the "current" you.  Lou explains. Branden talks about younger folks using the word "time."   Time is a luxury they think they have.  There's also herding and optimism, which may lead to a sense of invincibility, or not needing to worry about money.  Where are younger millennials and Gen Z getting information?  Well, largely from social media.  Most financial advice marketing is targeted toward folks that are much older.  This is a trend that needs to change.  So does the fallacy that a million dollars is some magic number for retirement. We also touch on young entrepreneurs who may be focused on the short term, and naive investors who are hoping to strike it rich by buying the right stocks.  There are major pitfalls to both. The best thing is to work with a financial advisor or CFP that can create a personalized plan for you early, that you can stick to. In our next episode we will cover real life horror stories of bad financial behavior. Resources: Lou Melone's book, "Unpack Your Financial Baggage:" https://www.amazon.com/Unpack-Your-Financial-Baggage-Misconceptions/dp/1948237776 [https://www.amazon.com/Unpack-Your-Financial-Baggage-Misconceptions/dp/1948237776] Melone Private Wealth Website: https://www.meloneprivatewealth.com/ [https://www.meloneprivatewealth.com/] D Business Magazine Website: https://www.dbusiness.com/ [https://www.dbusiness.com/]

Frank Guirlinger's Story

In a special episode of our podcast, RJ and Lou bring on a good friend of theirs, Frank Guirlinger, to tell his story. In 2005, Frank was living the American dream, working with in real estate development, building a seven-figure nest egg for he, his wife, and their two children. One day, he started having neck pain, which he attributed to long hours and hard physical work.  Then, one morning he collapsed and couldn't move.  He had a spinal cord infection, an abscess in the C3 area of his neck.   He ended up at DMC Hospital in Detroit.  He later found out that, at the time, doctors gave him a 25% chance of surviving surgery.  And they believed if he did, he'd be paralyzed and never even be able to lift a finger. But as he's always done, Frank kept fighting.   This included being unable to move, having to be intubated with pneumonia, and spending 40 days feeling like he was drowning.   But he improved, and was able to be moved to a facility in Ann Arbor. After being released, Frank went through more rehab, eventually running out of money.  He didn't want to ask for help, but was left with no choice.   But he continued to improve, weaning himself off of narcotics, and treating his pain and injuries with more holistic methods.  Today, he's able to move around, drive, and has most of his motor function back.    The last step in Frank's recovery is a trip to Panama for a stem cell transplant, which he hopes will alleviate more of his chronic pain.  He has a website where you can learn more. https://helphopelive.org/campaign/16189/ [https://helphopelive.org/campaign/16189/]

How To Build a Portfolio

Investors often want to know how a financial advisor is investing their money and how a portfolio is being built.  This is especially true in times of economic uncertainty, like we're experiencing now.  Today, Lou Melone of Melone Private Wealth rejoins RJ King to talk about this. A portfolio begins with understanding the client and their goals for their future.  Once that's established, it comes down to asset allocation, diversification, and rebalancing.   Lou explains each of these, citing a study that shows 93% of a portfolio's success comes down to this plan. Only 7% is tied to timing, selection, and the other things you'll hear about in the financial media. The word risk is often misused - a better term would be market volatility.  Whichever term you use, Lou talks about employing a 1 to 99 scale for a client's comfort in this area, as opposed to small, medium, and large. The primary tools in building a portfolio are stocks, bonds, bills, and cash. Which of these have performed the best over time, dating all the way back to 1802? The answer may surprise you. Lou talks about the "3 bucket strategy" for investing - putting money away for bear markets, for expected big ticket items, and finally, for your long-term future. One of the key qualities in being a good financial planner is also being what Lou calls a "behavioral coach."  This involves educating clients so they don't give in to their natural, human emotions, and stay the course. In our next episode, we'll talk to CFP Brandon Carney about the largest generation of wealth transfer that we've seen in quite some time. Resources: Lou Melone's book, "Unpack Your Financial Baggage:" https://www.amazon.com/Unpack-Your-Financial-Baggage-Misconceptions/dp/1948237776 [https://www.amazon.com/Unpack-Your-Financial-Baggage-Misconceptions/dp/1948237776] Melone Private Wealth Website: https://www.meloneprivatewealth.com/ [https://www.meloneprivatewealth.com/] D Business Magazine Website: https://www.dbusiness.com/ [https://www.dbusiness.com/]

How to Choose a Financial Advisor

In our third episode,  RJ King of D Business Magazine asks Lou Melone of Melone Private Wealth how to choose a financial advisor. The relationship is important from both sides, and Lou explains the difference between a "customer" and a "client." From the investor perspective, think of it as a four step process: 1. Think of the person or team who will advise you 2. Think of the type of company they work at. 3. Understand how the advisor is compensated 4. What is their planning strategy? There's a veritable alphabet soup of financial designations, and Lou tells the story of "chauffeur knowledge" vs. "Planck knowledge" (link below). Lou breaks down four of the main financial designations:  CHFC, CFA, CIMA, and CFP.  When it comes to choosing an advisor, the Certified Financial Planning Board recommends asking 10 questions, which we explain. There is a very big difference between asset management and comprehensive planning.  And due to certain rules and regulations, an asset manager can appear to be a comprehensive planner - even when they are not.  This is why it's important to do your research and ask questions.   This includes learning about the fiduciary standard. RJ also asks Lou about big Wall Street brokerage houses, and if there is still an advantage to using a larger firm over a smaller one.   Also, should an investor consider some Do-It-Yourself online tools? We cover costs and fees and the different ways financial advisors are paid.  Lou talks about the differences, and why they are crucial to understand. Finally, what is the value of a financial planner?  Lou cites articles from Vanguard and Russell Investments that quantify how important it can be to work with a planner - and why. In our next episode, Lou and RJ will cover how to build a portfolio for retirement that matches your financial plan. Resources: Lou Melone's book, "Unpack Your Financial Baggage:" https://www.amazon.com/Unpack-Your-Financial-Baggage-Misconceptions/dp/1948237776 [https://www.amazon.com/Unpack-Your-Financial-Baggage-Misconceptions/dp/1948237776] Melone Private Wealth Website: https://www.meloneprivatewealth.com/ [https://www.meloneprivatewealth.com/] D Business Magazine Website: https://www.dbusiness.com/ [https://www.dbusiness.com/] Mentioned in this episode: Lou's article on the Alphabet Soup of Credentials and "Chauffeur Knowledge:" https://www.meloneprivatewealth.com/blog/alphabet-soup-of-credential-and-chauffeur-knowledge [https://www.meloneprivatewealth.com/blog/alphabet-soup-of-credential-and-chauffeur-knowledge] Charlie Monger's USC Commencement Address: https://jamesclear.com/great-speeches/2007-usc-law-school-commencement-address-by-charlie-munger [https://jamesclear.com/great-speeches/2007-usc-law-school-commencement-address-by-charlie-munger] Ron Rhoades article in Think Advisor: https://www.thinkadvisor.com/2019/06/21/ron-rhoades-sec-reg-bi-is-greatest-securities-fraud-in-history/ [https://www.thinkadvisor.com/2019/06/21/ron-rhoades-sec-reg-bi-is-greatest-securities-fraud-in-history/] Russell Investments Value of an Advisor: https://russellinvestments.com/us/resources/financial-professionals/value-of-advisor [https://russellinvestments.com/us/resources/financial-professionals/value-of-advisor] Vanguard Value of an Advisor:https://advisors.vanguard.com/insights/article/IWE_ResPuttingAValueOnValue [https://advisors.vanguard.com/insights/article/IWE_ResPuttingAValueOnValue]